Though it wasn't quite on a par with that other major sporting announcement made last week, in terms of commercial scale it was enormous, significantly affecting equity prices in two companies with a combined market value of £37 billion.
BT’s unexpected decision to make its three sports channels free to broadband users caused shares in BSkyB to fall by more than 6% on fears over what the announcement would mean for the company’s dominance amongst pay-TV providers. One media analyst noted that: “The reaction is understandable. After all, BT is a major player coming into Sky’s market. We simply haven’t seen that before.”
But the market was not necessarily kind to BT, interpreting its largesse not as a media masterstroke, but more of a costly loss-leading exercise. Accordingly, BT’s shares also fell, by 2.3%, following the ‘game-changing’ revelation that the company would be giving extremely valuable content, upon which it is committed to spending £738 million over three years, away for free. In fact, it was only after BT posted its annual results the following day, highlighting a £2.6 billion adjusted pre-tax profit and confirming a 14% rise in the final dividend, that the company’s share price motored again.
Nonetheless, last week was a pivotal one for the former telephony arm of the Post Office. Despite the glitzy launch of its three sports channels and a costly recruitment of big name sports stars, it is still taking an enormous gamble.
In many respects, Sky still holds a significant upper hand in the UK’s sports broadcast market and, crucially, the rights to 116 Premier League matches a season. BT must hope that demand for its broadband products is sufficiently robust to cover the losses it expects to incur from screening 38 top flight contests each season from next August. Such a calculation is no foregone conclusion and its line-up of pundits, including great footballers, but unproven broadcasters, such as Michael Owen and Rio Ferdinand, will hardly inspire shareholders.
Furthermore, although BT is almost twice the size of Sky in terms of market capitalisation, it is not completely replicating the ubiquitous broadcaster’s well-established business model.
For two decades, Sky shareholders have approved colossal infrastructure investment in the knowledge that this effectively raised the cost of entry level for would-be competitors. BT clearly has sufficient financial clout to compete and it has emulated a number of pay-TV broadcasters across the world by buying potentially compelling sporting content. However, this is only one part of the equation: the classic way for broadcasters to rapidly build an audience is to screen sport plus new, blockbusting movies.
BT is, for now, limiting its entry to the wider broadcast market, promoting just three sports channels, a factor which could suppress broadband take-up, ie the whole purpose for spending enormous sums of money in the first place.
Moreover, BT has ‘history’ in this particular space. In 2006, it introduced BT Vision, an internet-based set-top box, with the express intention of attracting millions of broadband users. Today, it is estimated that no more than 770,000 homes have BT Vision; little wonder that the service is being sidelined in favour of YouView, another set-top box introduced last year by a consortium including the BBC, TalkTalk and BT.
Paolo Pescatore, a media analyst at CCS Insight, sees matters slightly differently and believes this is just the start of BT’s involvement in broadcast sport.
“This looks like a strategic, long-term play [by BT], not least because of the investment being pumped into infrastructure, sports rights and talent,” he said.
“Giving the sports content away for free to its broadband customers is a brave move. It shows BT is being realistic about how little content it has compared with Sky and demonstrates a real understanding of the cut-throat battle it is in to win fibre broadband customers in the UK.”
BT has not limited itself to acquiring football rights, which would be commercial suicide. It has assembled a broader football portfolio including FA Cup matches, as well as fixtures from leagues as diverse as Germany (which could prove a huge hit), France and Australia. It’s bought women’s tennis, Moto GP, women’s football and another potential ace, exclusive rights to 69 Aviva Premiership matches.
However, BT’s polished launch of what it hopes will prove a marketing masterstroke was not accepted lying down by Sky.
Sky’s sales and marketing director, Stephen Van Rooyen, said: “This is all about broadband and BT’s latest attempt to stem the flow of customers who’ve switched in their millions to rivals like Sky over the last few years.
“BT Sport is not ‘free’ and customers are smart enough to realise they’ll pay for it through more expensive broadband and phone services. Even after [BT’s] announcement, the vast majority of Sky Broadband customers would pay more than £110 a year extra for the equivalent service from BT.
“For us, sport isn’t a marketing gimmick to promote another product. We’re long-term supporters and our sustained investment has benefited sports fans and British sport at all levels.” Ouch.
Nevertheless, BT maintain that as they’ll be the first company to broadcast live top flight football free of charge for more than two decades, it is likely to become their unique selling point. As a result, according to another company spokesman, it is committed to its ‘sustainable’ price structure for the foreseeable future.
Existing standard broadband customers who spend £10 a month on their service will be able to watch Premier League matches gratis, but those who do not already subscribe to BT’s super fast fibre optic broadband service, BT Infinity, will be charged £15 a month, while high definition will cost an additional £3 a month.
Apart from consumers, perhaps the biggest winners in BT’s expensive assault on the broadcast sports will be pub landlords, many of whom have struggled to justify the costs associated with having a Sky feed into their premises. One pub owner maintained that live matches, even ‘big’ games, no longer attract significant additional patrons, “yet Sky’s costs keep going up”. Anecdotal evidence suggests that this is a common complaint. BT’s contention that its charges for pubs and other commercial premises will be 78% lower than Sky’s will undoubtedly help landlords affected by a prolonged economic downturn and the lingering, negative impact of the smoking ban.
Last week’s announcement was important for another reason: BT has effectively broken Sky’s monopoly position, vis-à-vis broadcast sport.
Whereas companies such as Setanta and ESPN were never more than notional competitors for an organisation that has benefitted enormously from the public’s Premier League obsession, BT is the real deal.
Economic theory maintains that in instances where audience demand remains unaltered but broadcast supply increases, prices should tumble. BT may have fired the first shot in a price war with Sky, a game-changing move which could conceivably benefit consumers where it matters most.
